Overcoming Madoff in Fund Management

by Elizabeth Harrin (London)

 “We have definitely seen a deterioration in potential investors because of Mr. Madoff’s activities,” says Tonya Powell, Principal at ELP Capital, Inc, investment company which specializes in real estate-secured assets. “The biggest issue is trust, and the almost automatic assumption created by the media that all fund managers may have participated in the same kind of activities.”

Judi Snyder, Partner at JP Snyder, Inc, a boutique financial planning firm, agrees. “Previously, people blindly trusted advisors and didn’t do their own research. This blind trust led to much of the current economic and investor climate.”

Both women’s firms are using multi-pronged approaches to win back consumer confidence. “There’s a fundamental shift – clients are demanding more education,” says Snyder. “I believe, however, Wall Street doesn’t necessarily want people to be educated.” This is a problem that Snyder’s firm is tackling head-on. “We give our clients homework,” she says. “We want them to do research, become educated and ask questions. We want them to take as long as they need to be comfortable with the investment options that we recommend.”

Communication is Key

To educate your clients you have to talk to them. “Even if the news is bad news, investors appreciate hearing from you,” says Nevada-based Powell. “We have done and will continue to conduct a series of webinars on our portfolio and consistent updates via mail and email so that everyone feels included. In addition, our CEO has literally been going through each and every investor with a personal call. Just hearing his voice has helped calm and reassure nearly every person.”

Powell advises that fund managers need to work out in the open. “Don’t hide,” she says. “Even though it may be easier to not want to take calls, answer emails, etc, if investors feel you are avoiding them, they will become even more nervous and potentially angry. Take their calls, answer their questions, pass along all news to them as best you can. By stepping up, assuming responsibility for that which you can, but also making sure boundaries are understood where you cannot fix the situation; it helps to create a much more friendly and smoother relationship between your company and your clients.” She also suggests that if investors want to meet face to face at the office and look through files for example, that this option – and anything else you can think of – is made available to them.

On the other side of the United States, in Florida, the story is the same. “Education and communication are the keys to helping the public better understand free market capitalism,” says Snyder, whose company is based out of Tampa.

Investors Must Do Their Homework

Snyder also believes that due diligence for investors is the way forward. “As an investor, if you don’t conduct due diligence, you are putting your life decisions into the hands of other people,” she says. “It takes time and work. We’ve seen the public adopt a victim mentality when they are let down by their advisors or when their investments perform poorly.” Snyder uses the example of someone buying a car to illustrate her point: “Most people do internet research to find the best car to buy,” she says. “A number of ‘consumer reports’ are likely to pop up. Most of the time, however, these studies are not independent, but are sponsored by an organization with a vested interest in the outcome – such as a particular auto manufacturer. The same holds true for financial instruments and strategies.” If potential clients don’t turn to the internet they might look to well-known media sources for information. “It is essential to take an objective look at who the advertisers and sponsors are behind these media giants,” adds Snyder, “and determine if there is an underlying slant or bias toward particular types of investments.”

With confidence in the financial markets at a low, now might not be the time to point out that investors who didn’t do their homework partly have themselves to blame. Powell believes that fund managers are also facing a challenge convincing clients that the firms are entitled to stay in the black when investors themselves may find themselves in financial difficulties. “It is both acceptable and right that a fund management company can and should continue to make money,” she says, “even if the clients have lost a portion of their portfolio.”

“Corporations are not the Godzilla-like monsters people often portray them as,” says Snyder. “They exist to provide goods and services to the world while making a profit. That is capitalism 101. The bottom-line is businesses keep people employed. If you vilify corporate profit – companies will be forced to shut down or move off-shore.”

Snyder advises that corporations should remind the public that they are made up of individual people: the CEO at ELP Capital calling every investor is a good example of this – it’s the human touch. “These people have names, faces and families,” says Snyder. “They are no different than anyone else. Each and every person has the right to make a living. Just as each corporation has the right to make a profit. Profits keep companies going during tough times, pay for research, help launch new products and services and keep the economy humming.” She recalls Citgo’s recent ad campaign. “It successfully focused on locally-owned retailers,” she explains. “By featuring these entrepreneurs in the campaign, it effectively tells the Citgo story by linking the corporation to every day people. These workers have a family, are supporting grandparents and putting kids through college.”

It’s a difficult message, but getting it across to the investor on the street is key to undoing some of the damage done since Madoff. “If there is no company to oversee their investments, then how do they expect to make any of their principal back?” asks Powell. “Hurting the company only hurts themselves, especially if it is small firm such as ours.”